Chapter 11 Not Suited for Small Businesses, Senate Panel Told

Tuesday, April 10, 2018
Chapter 11 Not Suited for Small Businesses, Senate Panel Told » 
On March 7, 2018, the oversight subcommittee of the Senate Judiciary held a hearing to discuss proposals to revise the Bankruptcy Code.  More specifically, to better facilitate Chapter 11 reorganizations for small and medium enterprises (SMEs).

Several witnesses appeared before the subcommittee to lend their opinion as to the effectiveness of the current Code for SMEs.  There was a strong consensus among professionals that Chapter 11 is ill-suited and not effective for small and medium businesses.  The expense alone can deter small businesses to completely avoid filing Chapter 11.

Two proposals were submitted at the hearing, one from the American Bankruptcy Institute and the other National Bankruptcy Conference.  Each attempting to address the much needed fix for SME reorganization.

The American Bankruptcy Institute’s plan would amend provisions of Chapter 11 as it pertains to small businesses.  Those revisions include:

  • Removing artificial deadlines that are unrealistic to meet, this will allow SMEs to establish sensible timelines
  • Reducing the amount of information an SME debtor must provide
  • Reduce SME reporting requirements
  • Remove the requirement to have a committee of unsecured creditors appointed for an SME case unless specifically requested by a creditor
  • Allow a party to request a neutral professional to be appointed with skills tailored to the particular debtor and the problems they are facing
  • A reduction of the cost for SMEs by streamlining the reorganization process
  • Providing an option that would allow an SME owner to maintain some ownership interest in the company

The National Bankruptcy Conference’s proposal is one that creates a system where small business debtors (those with less than $7.5 million debt) would be treated more like Chapter 12 or 13 debtors.  In this system a creditors committee would not be appointed and creditors would not vote to approve a plan.  An additional proposal under the NBC plan would be a revision to the absolute priority rule and would allow owners to retain their companies even if all creditors are not paid in full.